US GDP (Q4 2025 – final estimate)

What comes next?

• Real GDP growth was revised down 0.2 percentage points (ppt) to a lackluster 0.5% (annualized) in Q4, following a robust 4.4% gain in Q3. Despite a solid 2.1% expansion for the full year, 2025 will likely be remembered as the year that “could have been.” A rare confluence of supply shocks — tariffs, tighter immigration and elevated policy uncertainty — constrained activity, leaving growth below what strong organic productivity gains and rapid AI adoption would have otherwise supported.
   
• The outlook for 2026 appears even less favorable. The Middle East conflict is set to exacerbate existing headwinds, with higher inflation, weaker real disposable income growth, and tighter financial conditions further weighing on economic momentum.

The report offered a first look at the income-side of the economy and showed that real gross domestic income (GDI) rose a more solid 2.6% in Q4, outpacing GDP growth. Gross domestic output (GDO) — the average of GDP and GDI, which is considered a forward-looking gauge of economic growth — grew at a modest 1.5% annualized pace. Looking at the underlying trends, real GDP advanced 2.0% year over year (y/y) while GDI rose 2.4% and GDO rose 2.2% y/y. 

The disappointing end to the year largely reflected a self-inflicted drag from the longest government shutdown in US history, but private sector demand also softened modestly.

• Government spending subtracted 1.0ppt from real GDP growth, reflecting a shutdown-induced 17% plunge in federal outlays. 
   
• Real final sales to private domestic purchasers — GDP excluding trade, inventories and government spending — rose 1.8% on the quarter and 2.4% y/y.
   
• Real consumer spending growth was revised 0.1ppt lower to 1.9%, propelled by affluent households’ spending on services even as spending on durable goods was largely unchanged. 
   
• Business investment growth was revised up 0.1ppt to 2.4% on a 6.6% plunge in structure investment. This came despite a 4.3% advance in equipment spending and 5.4% rise in intellectual property products — both led by AI investment. 
   
• Housing activity remained depressed, with residential investment falling every quarter in 2025, down 1.7% in Q4. 
   
• Net trade subtracted 0.2ppt from growth as exports fell faster than imports.

The 2025 expansion was largely jobless, with just 116,000 jobs added as firms operated more efficiently in a high-cost, high-rate environment. Since Q4 2019, labor productivity has grown at a 2.1% annualized pace — well above the 1.5% rate of the prior cycle and broadly in line with its long-run average. These gains have been largely organic, reflecting longer tenures, better training, organizational streamlining and tighter operational discipline. AI is now building on that foundation and is likely to broaden productivity gains, with early signs emerging across sectors.

The report also shows corporate profits surging by $247b in Q4, with margins reaching a record 13.9% of GDP. Stronger productivity is containing unit labor costs, while growth gains are becoming increasingly concentrated — suggesting firms retain a buffer to absorb rising costs, including from tariffs.

But these gains are not being evenly shared. Labor’s share of income fell to a record-low 54.4% at the end of 2025, while profit margins have averaged a historically elevated 13% of GDP over the past five years — despite higher tariffs, labor costs and financing costs. While rising energy prices may pressure margins in the near term, firms continue to retain a larger share of output gains.

Looking ahead, the Middle East conflict has led us to revise our outlook. We now expect headline personal consumption expenditures (PCE) inflation to reach 3.0% y/y in Q4 — 0.5ppt higher than previously anticipated — while real GDP growth is revised down by 0.4ppt, with momentum slowing to 1.6% by Q4 2026. Globally, we have lowered our 2026 growth forecast to 3.0% from 3.3%.

Downside risks have risen materially. In a more severe and prolonged escalation — where oil prices remain above $100 per barrel, commodity prices rise broadly, financial conditions tighten and confidence deteriorates — inflation could approach 5%, while growth could weaken by more than 1ppt, significantly increasing recession risk. 

Beyond geopolitics, persistent trade policy uncertainty, lingering inflation pressures and emerging vulnerabilities in private credit and AI-related investment warrant close monitoring. While these risks are not yet systemic, limited transparency raises the risk that liquidity strains could evolve into solvency stress. Against this backdrop, we place US recession odds at 40%, with risks skewed to the downside in the event of a more prolonged or severe Middle East conflict.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.